Second Mortgage in Charge Off Status

What are the ramifications of a second mortgage in charge off status?

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Bill's Answer: Bills.com Resident Expert

Before addressing the central issues in your question, let us define "charge off."

Charge Off

Charge-off (sometimes called "write-off") is an accounting term used by creditors when they move a delinquent account from its accounts receivable books to its bad debt ledger. This usually occurs between 180 and 240 days from the date of the last payment. The fact that an account is charged-off does not mean the debt may not be collected later. The charge-off date also does not correspond to the statute of limitations on collecting a debt, or the date that an entry on a credit record must be removed. All three dates or deadlines are independent of each other and have different meanings. I explain more about the ramifications of a second mortgage in charge-off status in just a moment.

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Because an account is charged off does not mean the creditor lacks a legal right to collect the debt. To the contrary, the creditor may move the account to its own internal collections department, or sell the debt to a third-party collection agency.

Second Mortgage Foreclosure

Try to work out some sort of a payment arrangement with your lender for the second mortgage because if you go delinquent on your second mortgage, the lender can foreclose on your house and property. The foreclosure process varies from state to state, but generally takes from two to 18 months depending on the terms of your loan and your state of residence. However, normally if mortgage payments are not received within 150 days, the bank can proceed with the foreclosure process. The second mortgage would be repaid after the first mortgage is paid in full. In fact, if the sale price is less than the value of the mortgages held against it, then in some states you could still owe an unsecured balance called a deficiency balance. The good news is that this new deficiency balance (if it exists and if your lenders pursue it) is an unsecured debt that you could conceivably enroll into a debt settlement program.

Here is the good news: Lenders don't like to foreclose on mortgages. Foreclosures cost more than can be made back, so lenders foreclose only as a way of limiting losses on a defaulted loan. If homeowners get behind on payments, lenders will most likely work with them to bring the loan current.

To do so, however, the owner must stay in communication with the lender and be honest about the financial situation. The lender's willingness to help with current problems will depend heavily on past payment records. If the owner has made consistently timely payments and had no serious defaults, the lender will be more receptive than if the person has a record of unexplained late payments. For those falling behind in payments or who know they are likely to do so in the immediate future, they should contact the lender right away about meeting to discuss alternative payment arrangements.

Loan Workout Plan

An agreement between borrower and lender to prevent the loss of a home is called a loan workout plan. It will have specific deadlines that must be met to avoid foreclosure, so it must be based on what the borrower really can do to get the loan up to date again. The nature of the plan will depend on the seriousness of the default, prospects for obtaining funds to cure the default, whether the financial problems are short term or long term and the current value of the property.

If the default is caused by a temporary condition likely to end within 60 days, the lender may consider granting "temporary indulgence". Those who have suffered a temporary loss of income but can demonstrate that the income has returned to its previous level may be able to structure a "repayment plan". This plan requires normal mortgage payments to be made as scheduled along with an additional amount that will end the delinquency in no more than 12 to 24 months. In some cases, the additional amount may be a lump sum due at a specific date in the future. Repayment plans are probably the most frequently used type of agreement.

Foreclosure, Generally

Foreclosure is a serious situation that has serious repercussions. If you can, you want to avoid a foreclosure as much at all costs. Bills.com is here to help. We also offer helpful guides, foreclosure FAQs, glossary terms, and other helpful tools to help you keep your home and avoid a bank repossession.

You can find more in depth information about foreclosures on our Bills.com foreclosure page on our foreclosure information page. See also Home Affordable Foreclosure Alternatives Program

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

Comments (249)


Steve S.
Fort Myers, FL  |  February 15, 2012
I was forgiven my second morgage and was discharged last year chapter 13 in october can i know sell my house for a profit since the second morgage is gone i do have equity or can my creditors come after me for monies.My att. told me that since it is not filed with the courts yet the case is tech.still open and they could come after the poss. come after the money
Bills.com
February 15, 2012
Your lawyer has more facts about your case at his or her hands than I do, so it would be foolish for me to comment on your situation.
Omar P.
Gilroy, CA  |  February 13, 2012
Hello, I am in a different situation. I claimed bankruptcy in 10/11 but did not include my house which is upside down. I owe 275k on the first but the second I owe 350k with Chase. The second gave me a modification which is unaffordable. I told them I can no longer make the payment and they suggested that I ask for a settlement review. They also want to see proof of funds when I make my offer.What should I offer or what would be reasonable? I have a steady job but pay 1700 on the first and 1100 on the second. My take home is only 4300 monthly and I have three children.
Bills.com
February 13, 2012
The first sentence in your message confuses me for three reasons. First, all debts are supposed to be included in a bankruptcy filing. Second, even if you could pick and choose which debts to include in a bankruptcy, I am confused why you would not include an upside-down mortgage. Third, given your income, I wonder why you did not realize the mortgage was such a large fraction of your take-home pay when you filed for bankruptcy.

"Reasonable" varies according to the situation. I suspect there are more relevant facts to your case than what you shared. Accordingly, I urge you to consult with a lawyer in your state who has experience negotiating with mortgage companies.
Fred H.
Freehold, NJ  |  February 03, 2012
My situation is a little different.I have equity. I have a first that by the grace of god after fighting for it i got a Modification with BOA(280,000.00).My second loan is with PNC who will not help at all. They really are a different breed.They are a one way street. They are threatening to foreclose and put account in chage-off without warning.They claim i have equity and tell me since i am charged off they cant do a payment plan or anything of such. They will only take a settlement offer. So i wrote my hardship letter and offererd ten percent on 150,000.00. They told me that i insulted them and said they are pushing for forecloser. I asked to take to the super and she said the lowest they will do is 60,000.00. I really cant get this amount so im hoping that later they will come down.Someone told me that after forecloser starts you can do mediation with a lawyer? I dont want to lose our house and can not beleive how these banks took our tax money to bail them out and then turn around and put the people who saved them out on the street with kids and could really care less! Sorry to vent Thank you this site really helps in many ways.
Bills.com
February 04, 2012
Consult with a lawyer now. For example, Nevada offers an excellent mortgage mediation program the other states should adopt. Your state may offer a mediation program too. If not, a lawyer with foreclosure background may be able to negotiate a deal with PNC that both parties can live with.
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Saqib S.
Sterling, VA  |  February 11, 2012
I'm in the exact situation you are, ie PNC has my second mortgage and is not willing to negotiate as my account has gone into charge-off. Send me a message on my email address - vtmuslim@gmail.com and I'd like to compare notes on how to deal with PNC. Thanks.
Wayne B.
Valrico, FL  |  January 13, 2012
Florida I became unemployed 2 yrs ago. My home value went from 180K to 100k. I owe 140k on my first mortgage and 7k on second. I am behind 21 months on the first. 12 months on second. Chase who owns the first sent me a letter saying if I did a Title in Liew of Payment they would accept and would write off difficency. But I have to have a free title. I called the Bank that holds the second and they said my second was written off and given to a collection agency. Upon talking to collection agency and my circumstances, they offered no solution, just that I would have to pay. When they write off the loan is there still a lien on the house. Is my only other option to let the first forclose, then file Chapter 7.
Bills.com
January 13, 2012
The terms "write off" and "charge off" have meaning in the accounting world, but not in the legal world. A court does not look at charged-off debt any differently from debt the creditor has on its current account ledger. "Write off" and "charge off" does not mean the account is canceled, forgiven, or extinguished. See the Bills.com resource Charge Off for a more complete discussion of this oft-misunderstood phrase.

Consider offering the collection agent a lump-sum settlement of the debt.

Consult with a bankruptcy lawyer to discuss your options. You need not wait for foreclosure to free yourself for the personal liability for the debt. In fact, doing so now may give you more leverage in dealing with the collection agent.
Heidy P.
Hyattsville, MD  |  January 12, 2012
Hi, I fell behind on my mortgage back in 2009. I have 1st and 2nd mortgages. I applied for a loan modification and got approved for the 1st mortgage. My second mortgage at that time $85,000, was sold to a third party. Now I owe the 2nd mortgage $109,000. I lost my job and got a new job recently. All that I am earning now, goes to my monthly debts. I could borrow some money from a family member to make a settlement, but dont know what a good amount to offer them would be.
Bills.com
January 12, 2012
There is no clear answer on how much to offer in a settlement. Key factors are your ability to pay and the aggressiveness of the creditor. If your income could be garnished, for instance, the creditor may be unwilling to negotiate a settlement, even if you offer a large amount. If, on the other hand, your income and assets are safe from a creditor's reach or if you could discharge the debt in a bankruptcy, a small amount settlement offer could be successful. A general rule is to start low in any negotiation. You can always increase your offer, if need be. I suggest that you start at 10-15%, if you can afford it.
Samir J.
December 01, 2011
I live in MN and have a first and second from Wells Fargo. I owe 290K on first and 80K on second. I am trying to work out a short sale. Wells Fargo (1st) is ready to accept the buyer offer of 280K. After settlement 1st will get 245K. But the 2nd won't get anything. I offered 16K towards settlement at closing. Wells won't even consider it. They want me to sign a promisory note that I will pay back the deficiency. I intend to leave US and go back to my home country. My attorney suggests me file for bankruptcy and get rid of the second. I don't want to do it but paying 80K from India will be a payment of lifetime!!!
Bills.com
December 03, 2011
I am not sure why they want you to sign a promissory note, as you might still be liable for the debt after the short sale regardless. If you will not be liable you certainly have no reason to sign the note, and if you are liable, then the second mortgage holder will likely proceed to collect on the loan through a court judgement.

I recommend that you follow your lawyer's advice. If you wish to avoid a bankruptcy, speak again with the lender and tell them that you are making a very generous offer, and if they refuse, then they will be left with nothing. In fact, if you are eligible to discharge the entire debt through bankruptcy, then you may want to offer them less than $16,000. If you negotiate a settlement, get the agreement in writing before you pay and hold onto the paperwork, in case you need to prove the debt is satisfied.
Jeanny Q.
Concord, CA  |  November 17, 2011
Hi Bill, I recently looked at my credit report and it displayed my first mortgage Ocwen as foreclosed but my second mortgage Wells Fargo Account charged off. $52,107 written off. $4,249 past due as of Nov 2011. The condo foreclosure feb 2011. Would I still owe them anything to Wells Fargo? I bought me condo at the age for 20 for 274,000 when it foreclosed it was worth 79,000. The realtor got me a huge loan and made my mortgage adjustable. Would I be able to fight this because I only made about 24000 yearly and they approved for such a big loan? My loan company shouldn't of approved me, can I do anything to fight this. It was the home I lived in for 5 years and then the mortgage went adjustable and I'm located in California. I now can afford a home but can't buy how long before I can purchase. My credit is 630 now but it use to be 750 or higher. Thanks, Jeanette
Bills.com
November 18, 2011
Your best course is to speak with an attorney. You can discuss whether you were the victim of predatory lending (and it appears to me that you were) and whether you can take action to remedy the situation after so much time has passed. If you can't invalidate the underlying claim against you, then you could very well be on the hook for the deficiency balance owed to Wells Fargo (and your first mortgage holder, too). When you speak with the attorney, bring all the paperwork you have regarding your loan and any communications you received from the lenders and see if your loan is a recourse loan or a non-recourse loan and find out what the anti-deficiency laws are in your state.
Troy T.
Norcross, GA  |  November 10, 2011
I live in GA and I foreclosed on my home in Jan 2010. My home Wells Fargo equity line was charged off and recently (Nov 2011) my bank exercised it's right of settoff and debited money from my personal checking account. If I close my checking account and open a new account with a different banking institution what other recourse does Wells Fargo have to collect money on the charged off loan? Can they garnish wages?
Bills.com
November 10, 2011
Wells Fargo cannot garnish your income or levy a bank account without a court order. As you noted, funds you held in a Wells Fargo account did not need a levy, as the right of offset gave Wells the authority to reach into other Wells Fargo accounts you possessed.

Wells Fargo can choose to sue you, to obtain a judgment that would give it the ability to garnish wages and come after assets, consistent with the governing collection laws (very likely the ones in GA).
Shannon D.
Columbia, SC  |  November 01, 2011
My first mortgage is a VA loan was modified under HAMP with Chase. The modification took several months but had a successful outcome. I also have a second mortgage which was 125% LTV with GMAC. I was behind in payments on the second. While I was waiting on the modification of the first I received a Fedex letter from GMAC offering a payment reduction. I signed the agreement and mailed in my new payment. A couple of months later I received another letter from GMAC offering a even lower payment. Again, I signed the acceptance and mailed a check. A month later I received a settlement offer from GMAC in the amount of $3900 (10% of the loan). They wanted me to send a cashiers check if I accepted their terms. During this entire process of new lower payments and the settlement offer, I tried to reach the individual in GMAC's Loss Mitigation Department who sent each of the correspondences. I left messages (when the voicemail wasn't full), I tried to reach other individuals, etc. Never was I able to reach anyone at GMAC. I borrowed funds from a relative but was afraid to send in the cashiers check for the settlement with fear it would end up like the past two payment reductions. The next thing I know I receive a letter from an investment firm who bought the note pennies on the dollar and GMAC charged it off! An assignment was never made so I didn't pay this firm anything. They then sold it to a private company that specializes in the Acquisition, Management and Liquidation of defaulted residential mortgages. They specialize in second mortgages. Public records show that GMAC assigned the deed to this private company a few days ago. They have called threatening. I'm current on the first mortgage and upside down. I plan to call them but I wanted advice on how I should proceed with this new firm. Can they actually foreclose? If GMAC charged off the loan and then assigned the deed over, I'm I obligated to pay anything to GMAC or do I pay the new lien holder. They of course bought the note for pennies on the dollar. Any advice that you can offer is very much appreciated!
Bills.com
November 01, 2011
Charge off means nothing to consumers. It is an accounting phrase that means the creditor moved the account from its current accounts book to the bad-debt line on its general ledger. Charge off does not change the legal rights of the creditor or debtor. A creditor may sell or assign a collection account to a collection agent, and the collection agent has the same rights to collect that the original creditor did when it owned the account. Here, this means the collection agent who owns the collection account can foreclose.

My advice? Consult with a lawyer who has contract litigation or real property experience to help you negotiate a fair settlement to the collection account.
Stacey S.
South Jordan, UT  |  November 01, 2011
In 2007 I purchased a home with a 1st and 2nd through BOA. Due to the real estate blow up in 2008 I lost 70% of my income so in July 2009 I ended up filing a chapter 7 BK. I reafirmed my current 1st mortgage but not my 2nd. In April 2010 I was finally able to get a loan modification for my current 1st.(current since my modification) I have been trying to modify my current 2nd but am not having much luck. I am now 31 mo behind and 22,000 in payments. It seems as though BOA wants to do nothing to help. I am torn of what to do since I currently owe more on my 1st then my house is even worth but I still have a 2nd for 102,000+ 22,000 in back payments. I don't want to move but don't have 22,000 to catch up the payments let alone don't want to owe 130,000 more on my house then it is worth. If they forclose on my home there won't even be enough to pay off my 1st. Any advise of what to do with my 2nd?
Bills.com
November 01, 2011
If home loans are discharged in a chapter 7, and the home owner does not reaffirm the loans, the discharge strips the homeowner's personal liability for the loans. This means that the homeowner can walk away from the property, allow a foreclosure, and have no personal liability for any deficiency balance.

Here, you reaffirmed the senior home loan, which reinstated your personal liability for this loan. Whatever you do, do not reaffirm any debt discharged in bankruptcy without consulting a lawyer so that you are aware of the usually non-existent pros and significant cons of reaffirmation. You mentioned you did not reaffirm the junior loan, which gives you considerable leverage when negotiating with the mortgage servicer or collection agent the mortgage servicer sold the collection account to.

Basically, the collection account for the junior is worthless if you are willing to walk away from the property in a strategic default. Is the mortgage servicer or collection agent for the junior pursuing you for the balance? If so, and you cannot negotiate a settlement, then quit the property. If the mortgage servicer or collection agent for the junior is not pursuing you, then stop pestering the servicer or collection agent to negotiate a settlement it does not believe it can collect.
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